Overview
2026 has brought a period of change to the Federal Reserve with the appointment of new Fed chair Kevin Warsh. Investors have also been presented with a dynamic set of evolving geopolitical events and changing inflation expectations resulting in a pivot away from dovish monetary policy views toward anticipation of either more hawkish policy, or possibly an extended pause in adjustments to the Federal Funds Target Rate. As we venture further into the second half of the year, here are some thoughts to keep in mind.
What’s Changing at the Fed?
Kevin Warsh was sworn into office as chairman of the Board of Governors of the Federal Reserve System on May 22nd. His term as Chair will continue through May 21, 2030. Chair Warsh has suggested several possible changes to the Fed’s operations, and created a slate of five task forces to opine on these topics. Task forces were established to address Communications, Balance Sheet Policy, Data, Productivity and Jobs, and Inflation Frameworks. The timeline for the task forces to complete their work is fairly short, with most or all expected to conclude by year-end.
Forward Guidance
Much attention has focused on Chair Warsh’s suggested elimination of forward guidance. What does this mean? Forward guidance is used to communicate the likely path of future short-term rates to the public. The Fed’s use of forward guidance began in the early 2000s and became integral to the Committee’s communication during the Global Financial Crisis. Warsh favors eliminating forward guidance and has already shrunk the amount of language in the Fed’s post-meeting statements. The rationale for this change has centered on a desire to see investors focus on data, rather than forward-looking communications from the Fed. Some proponents think the elimination of forward guidance could reduce rate market volatility, but others think that investors will continue to price an expectation of Fed policy, just with less information. With less information at hand, it is possible that rate markets could see an upswing in volatility, especially given the greater probability of the Fed surprising the market with an unexpected decision. At its core, this is fundamentally a debate about how far the Fed should go in setting policy, versus how much can be handled by the market itself.
Balance Sheet
The Fed balance sheet has also been a target of Warsh’s attention. The Fed’s balance sheet holdings, which primarily consist of US Treasuries and mortgage-backed securities, peaked in 2022 at more than $8.9 trillion. The Fed subsequently allowed a portion of those assets to roll off the portfolio but halted quantitative tightening in December 2025. The balance sheet now stands at $6.7 trillion. Warsh has asked the task force addressing balance sheet policy to determine whether it is the Federal Funds Rate or balance sheet activity
that is driving monetary policy. While Warsh has a history of favoring a smaller Fed presence in the market, investor views differ as to the feasibility of further reducing the size of the balance sheet. Timing is also a factor, with some commentators suggesting it could take years to meaningfully shrink the Fed’s holdings without disrupting markets.
What do Portfolio Managers Think?
Given the market’s dramatic repricing of interest-rate expectations so far this year, we thought it made sense to query a sample of asset managers for their views on rates and inflation. We asked 17 asset management firms to provide an update on their year-end 2026 expectations for the Federal Funds Target Rate, the 10-year Treasury yield, and CPI inflation. This survey was conducted in late June, so responses were sent and received after Warsh’s first FOMC meeting. Responses indicated that year-end expectations had increased for the three rate and inflation forecasts we requested. No manager was forecasting a rate cut, and no responses suggested less than a 4% yield on the 10-year or less than 3% CPI inflation. Inflation expectations increased by nearly 90 basis points from our year-end 2025 survey.
Our Position
The Federal Reserve is considering several potentially significant changes to its operations and policy frameworks. The effects of the elimination of forward guidance, potential balance sheet reduction, and other possible changes to Fed communications, policy, and data measurement are up for debate. These changes may influence investor behavior and could affect market volatility.
An important consideration in all of this is Fed independence, and the market’s view of the credibility of Fed policy statements. While we will have to wait to see all the results, investors should remain committed to process-based decision-making with an eye toward long-run results.
Disclosures
The views expressed herein are those of Asset Consulting Group (ACG). They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm.
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